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Nadeem
Veteran Investor
Joined: 11 Jul 2004
Posts: 639
Cash Points ££ 13955.74
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 Posted: Wed Jan 31, 2007 5:18 am Post subject: Central Bankers Warn of an Impending US Fiscal Crisis |
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This past week, Ben Bernanke warned the US Congress that our nation faces a ‘fiscal crisis' if the out of control spending habits of Washington aren't soon curbed. I suspect he used the word ‘curbed' quite deliberately as the politicians starting back at him probably looked like a row of dogs listening to white noise. Can't you just picture it? A bunch of congressional heads all tilted to the side with studious expressions on their faces, but a stylized question mark floating in a little text balloon over each of their heads?
As the author Upton Sinclair famously remarked; "It's difficult to get a man to understand something, when his salary depends on him not understanding it." Which is a fancy way of saying that roughly zero congressmen "understood" what Bernanke was saying, although at least a few probably possessed the requisite intellectual candlepower to ‘get it'.
Bernanke began his testimony by restating what we already know:
"Dealing with the resulting fiscal strains will pose difficult choices for the Congress, the administration, and the American people," Bernanke said.
"However, if early and meaningful action is not taken, the U.S. economy could be seriously weakened, with future generations bearing much of the cost," he added.
Breaking out our handy-dandy central banker decoder ring we can decipher his statement as follows:
"You guys are gonna have to either break your past entitlement promises and face an angry electorate or you're going to have to raise taxes to hurtful levels and face an enraged electorate".
"Unless you do one (or both) of these things, the future looks mighty bleak".
Which is why all the congressmen resembled dogs listening to white noise. But Bernanke was probably quite comfortable with their feigned puzzlement as long as he was able to deliver the real message, possibly of the CYA variety, a little later:
He said the worrisome outcome taking no action would be what over indebted corporations call "the death spiral":
"Thus, a vicious cycle may develop in which large deficits lead to rapid growth in debt and interest payments, which in turn adds to subsequent deficits," Bernanke said.
Ah! Now we see. Bernanke is actually worried about what will happen to our monetary system once the era of ‘ free money for everyone' that congress has grown so accustomed to over the years lurches to a halt. The virtuous cycle of ‘more borrowing leading to more money chasing fewer economic opportunities leading to lower interest rates' will someday morph into it's evil twin the vicious cycle where (1) more borrowing leads to (2) higher interest rates which lead to (3) higher debt payments which the lead back to (1) more borrowing, which leads to (2), then (3), then (1,2,3 - real quick), then (123123123123123) so fast you find yourself running to store to spend your money only to find they ran out of wheelbarrows a long time ago.
In short, he's worried about how his particular private industry, the Federal Reserve and its member banks, are going to fare under this scenario. And he's not the only central banker out there hitting the pavement and making dire statements.
First, Paul Volcker, the legendary (and deservedly so) former Federal Reserve Chairman stated in 2005 that there was a 75% chance of a dollar crisis in the next 5 years and that ‘we are skating on increasingly thin ice" . I know these quotes come from nearly two years ago but they set the stage and everyone should be aware of them. When Volcker says such things, it is best to listen. It's like the fire marshal telling you to exit a crowded movie theater...knock people over if you have to but get out of there!
Next, Timothy Geithner, a Federal reserve Governor , had this to say about derivatives in September of 2006: The same factors that may have reduced the probability of future systemic events, however, may amplify the damage caused by and complicate the management of very severe financial shocks. The changes that have reduced the vulnerability of the system to smaller shocks may have increased the severity of the large ones.
More - http://www.marketoracle.co.uk/Article284.html |
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